Payroll management tips for small businesses and startups

Processing payroll is a crucial, yet tedious task. Employees who don’t get paid on time or whose pay is miscalculated will quickly start looking for a new job, which leaves the business with vacant positions and accumulating turnover costs, which can be as high as 1.5 to 2 times the employee’s salary. In short, payroll is an area of business where organizations simply cannot afford to go wrong. 

While large international organizations can rely on well-staffed, experienced payroll teams to calculate employee wages and salaries as well as the mandatory deductions, startups and small businesses often lack the necessary experience and manpower. This often results in costly payroll mistakes, additional work for their small team and increasingly unhappy employees because pay is either late or calculated wrongly. 

The solution is an effective payroll management that not only ensures compliance, but also the timeliness and correctness of wages and salary payments. In this article, we’ll show you how to get there by sharing 8 valuable payroll tips for small businesses and startups.

Payroll management refers to all the processes related to the administration of a business’s payroll-related documents, reports and processes. In other words, it’s all the administrative work behind payroll which needs to be completed before, during and after the calculation of wages, salaries and deductions. 

Tasks related to payroll management range from applying for the necessary social security and tax identification numbers to collecting the employee information needed to process payroll to keeping detailed payroll records. It also involves setting up a payroll system and developing payroll procedures that work best for the business. 

Given the variety of legal regulations, the number of processing steps, and all the additional tasks the payroll process entails, it’s easy to see why payroll management is a challenge for small businesses and startups. Compared to large enterprises that have a whole department dedicated to payroll, newly founded and small businesses operate with a small team where one or several members of staff have to take over the payroll responsibility in addition to their normal workload. Here are 8 actionable payroll tips that will help you successfully manage payroll in your organization.

Complete all the registration processes

Different countries may have different rules as to how many registration processes are necessary in order to set up payroll, but they all have one thing in common; they all have to be completed before a business can start processing payroll. Organizations failing to do so will encounter severe hold-ups down the line, which will result in additional work, stress and longer processing times for payroll. 

If, on the other hand, all the registrations have been completed, including those for online government portals used for payroll tax and social security declarations, there are no hurdles to the first payroll run and withheld tax and deductions from employee wages and salaries can be reported and remitted to the authorities immediately. 

Choose your pay period wisely

Daily, weekly, bi-weekly, semi-monthly, monthly… There are several pay periods employers can choose from. A pay period, also known as pay frequency or pay schedule, describes how often employees get paid. In most countries, the payroll frequency is regulated by law, typically making it mandatory for employers to pay their staff at least once per month, as is the case in Japan, for example.

But it’s not just legal restrictions businesses need to keep in mind when choosing a pay schedule. For instance, it could be customary to pay employees in shorter intervals than those set by law and offering shorter pay periods may therefore be necessary to help attract talent, since employees often prefer being paid more often. However, the more often you process payroll, the more time you have to invest into payroll processing. And since time is always a precious good for startup founders and small business owners, the decision should be taken wisely – especially since the team is likely to grow in the future, making it harder and harder to keep up with shortened payroll cycles.

Stay up to date with payroll regulations and wage laws

Laws and regulations change all the time, and payroll is no exception to that. There are many countries which are currently working on modernizing their payroll infrastructure and implementing new systems for businesses to remit and declare withheld income tax and social security contributions. These changes are often accompanied by new payroll and reporting requirements businesses have to meet if they want to avoid fines.

Another payroll-related aspect that is also subject to frequent legal changes is compensation. Many countries have introduced a national minimum wage or have minimum pay rates set by regional governments or through collective bargaining. Since minimum wage rates are frequently updated, it’s crucial for startups and small businesses to keep up to date. For an overview of current minimum wage rates around the globe, check out our related blog post. 

Properly classify employees and contractors

Employee misclassification is a common compliance pitfall for businesses of all sizes, and the consequences of wrongfully classifying an independent contractor as an employee go well beyond a bad reputation and additional paperwork to change the worker’s status. What many businesses don’t realize is that the classification of workers also has a direct impact on payroll.

While contractors must be paid for their services just like full-time employees, these payments are not part of your monthly (or weekly, or bi-weekly or bi-monthly) payroll and must therefore be processed separately. In addition, businesses are not responsible for withholding tax or social security contributions on behalf of their contractors who manage their own taxes and social insurances. 

Get a time tracking system

There is one golden rule when it comes to payroll; the less manual work, the better. Having to collect employee timesheets at the end of each pay period can be a daunting, stressful task. Very often, employees don’t have their timesheets ready when they should, or they’re out of office on the day timesheets are collected. Since the timesheets of all employees are needed to process payroll, not receiving them on time can delay the whole process. 

This can easily be avoided by investing in a time tracking system. Time tracking software keeps track of employee working hours and absences and stores the information in a central database where the data can be accessed for payroll purposes. Not only does this mean no more manual work to enter clocked hours, but it also helps improve compliance because it’s easier to check whether working hours and overtime are within the legal limits. Also, some countries have introduced laws requiring employers to keep track of their employees’ working hours.

Interested in knowing where employers need to record working hours? Then check out our related blog post. 

Create a payroll and compliance calendar

There are three crucial aspects when it comes to payroll, namely timeliness, correctness and compliance. Employees need to get paid on time, the calculation of their wages and salaries needs to be correct, and, last but not least, the business has to comply with all the rules and regulations that govern the payroll process. Especially with regard to remitting withheld income tax and social security contributions and submitting the respective monthly declarations to the authorities, timeliness is crucial; otherwise, the business risks steep fines. 

Another payroll management tip therefore consists in creating a comprehensive payroll and compliance calendar where all the crucial dates are indicated which are related to the payroll process. For small business owners and startup founders, having such a calendar is a major advantage, since it helps them remember important deadlines – even more so, when they start to hire abroad and have to process payroll in various jurisdictions. 

Don’t forget about payroll records

In the rush of getting payroll over and done with, many organizations overlook one crucial aspect of the process, which is the necessity to maintain employee payroll records. Rules for payroll record retention may differ, but most countries require businesses to keep at least some basic payroll records and have them ready for inspection at any given moment.

Since failure to keep record of payroll processes, salary information and more can result in fines, startups founders and small business owners should do their due diligence and check the legal regulations for recordkeeping in payroll. 

If you’re interested in hiring employees and processing payroll in the United States, you should check out this blog post which tells you everything you need to know about payroll records in the U.S.

Outsource payroll or invest in payroll software 

Organizations generally have three options to manage and process their payroll. They can either manage and process payroll manually, or use payroll software, or outsource the process to an external payroll service provider. Manual payroll processing may be the only one of the three options that doesn’t involve additional costs, but it’s very time-consuming and uses up time that could be better spent on other things like growing the business. 

Therefore, the most important payroll tip for small businesses and startups is to invest in a robust, easy-to-use payroll software or use an external service provider to handle the entire process. While payroll outsourcing may be the most expensive option, it’s by far the one with the highest compliance guarantee because payroll services take care not only of the payroll process itself, but also of the submission of all the necessary tax returns and social security declarations.

Lano’s global payroll solution offers startups and small businesses the best of both worlds. Thanks to our global network of top-tier payroll service providers, you can outsource your payroll processes to trusted partners in over 170 countries and have your local payroll up and running in record time. What’s more, you can integrate all your payroll partners with our cloud-based platform, which allows you to access and consult up-to-date payroll data for your entire team in one centralized database. Book a demo with our expert team to learn more.